There’s a term of art in 1031 exchanges called “boot.” In this article, we will define boot and discuss some examples that you might run into during your 1031 exchange.
Boot is basically any non-like-kind property you receive during a 1031 exchange. For example, let’s say you exchange an apartment building for another apartment building, but you don’t reinvest all of your cash. That cash is boot (i.e. non-like kind property you received during the transaction).
Another way to get boot is if you engage in seller-backed financing on the sale of your old relinquished property. If the buyer gives you a promissory note for 10% of the purchase price and you put it in your pocket, you’ve just received some non-like-kind property in the exchange process. So seller-backed financing can be a tricky area. You want to work with your QI to find ways to redeploy all of your net proceeds (cash and non-cash) into your replacement property.
Boot can also come in the form of personal property that might come along with the real property. Usually small incidental amounts of personal property are not a big deal. But if you’ve got a large amount of personal property (maybe forklifts or other business equipment in a real estate exchange), those items of personal property might trigger some boot.
One way to fix this issue is to have separate purchase agreements for the personal property and to pay for that with non-1031 funds. That way you are able to keep your 1031 monies apart from any other assets that might not be considered like-kind.
There is also another term called "mortgage boot." If the property you are selling has debt encumbering it, that relief of the debt may be considered boot to you when the relinquished property is sold and the debt is discharged (or assumed by the buyer). In order to off-set this potential mortgage boot and so you do not have to recognize gains due to the debt-relief, you should either take-out an equivalent or greater amount of debt in conjunction with the purchase of your new replacement property (equal to or greater than the old debt that was satisfied or assumed by the buyer of your old relinquished property). You may also invest additional non-1031 cash for the purchase of the new replacement property.
- 1031 Hotline: If you have questions about boot in a 1031 exchange, feel free to call me at 612-643-1031.
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